Here's Why Many Investors land up with Dud Investments

Dec 17, 2015

In this issue:

» Small Cap superstars of 2015

» Next US recession only 12 months away?

» ...and more!

0.00

The customer is king, says the old adage. But what if a business' customers are kings? Every businesses' biggest mantra for success is having key customers. So if it is able to count reputed, big-name companies as its list of regular patrons, you know you have a successful business on your hands, right?

A recent article in Mint reminds us that Italian car designer Pininfarina 'has designed cars for Ferrari, Maserati, Rolls-Royce, and Cadillac'.

If a car-designer can count legendary car-markers as clients, business must be blooming right?

Wrong. Here's the next line from the Mint article: 'The Cambiano-based firm has been unprofitable for 10 of the past 11 years and has been battling high levels of debt.'

How can that be?

Well, in the world of business, looks can be deceiving; the surface can be radically different from what lies beneath.

Businesses are made up of many moving parts. From customer acquisition, asset acquisition, marketing, pricing, operating efficiency, a long-term sustainable product, a management that emphasises profitable growth, financing...the list is long. It is the seamless coming together of all of these factors that makes a successful, wealth-creating business. An overdependence on one factor does not.

In the heat of the moment, stock market investors often forget this most basic of business tenets. They run with a very simplistic view of the business and obsess over a single feature...all the while bidding up its stock price.

The company might be part of the 'ecommerce revolution', or have the 'biggest market share', or 'tremendous growth potential', or some 'new product' with 'huge demand'. It can be anything, but investors tend to latch onto a single factor about the business that sounds exciting at that point in time. And before long, they're willing to pay anything for the business. That's when PE ratios go through the roof.

In their single-minded focus, investors neglect to take a deeper look at the other aspects of the business. They don't even pop the hood. In such cases, unless they're lucky, it's just a matter of time before they burn their fingers.

Speaking to a US audience in 2000, Sergio Pininfarina, head of Pininfarina said, 'If it looks right, it will work right.'

Sadly, while this may be true in the world of car design, it is not in the world of businesses. There is always a need to look deeper. There is always a need to look at the whole picture.

Have you ever ended up with a losing investment because focused too much on a single strong aspect of the business? Let us know your comments or share your views in the Equitymaster Club.

--- Advertisement ---
Do You Know This SECRET To Increase Your Investment Returns?

Let's face it... Investment advice is dime a dozen.

But even at that price, is it worth it?

For example, most people will tell you small caps are risky and you should stay away from them.

Yet, certain small caps have gone on to deliver returns like 139% in seven months, 100% in one
year one month, 241% in three years three months, 126% in eleven months, 79% in four months, 2,263% in six years
and three months, 832% in five years eight months, and more.

Wouldn't you want to benefit from such recommendations too? Or would you just ignore it because somebody
told you small caps are dangerous?

For more than seven years, we at Equitymaster have been recommending our subscribers high-potential small
caps.

And the returns you just saw are from just some of our small cap recommendations.

2.35 Chart of the day

With the Modi Euphoria taking a back seat, the benchmark indices painted a sorry picture for the year 2015. The Sensex is down 7% for the year so far and barring a miracle, looks set to remain this way by the time the year comes to a close. However, this doesn't mean individual stocks haven't performed. A lot of stocks in Small Cap space have bucked the trend, ending up higher by as much as 600%. Yes, that's right. As today's chart of the day highlights, Intrasoft Technology has been the best performing small cap stock this year, going up a fabulous 7x. In fact, there are others that have gone up anywhere between 4 to 5 times.

A word of caution here. These stocks going up doesn't mean all come equipped with rock solid fundamentals. Do understand that markets in the short term tend to be voting machines where prices are more sentiment driven than facts driven. Consequently, the focus should be more on things like the company's business model, its financials and valuations. And if these don't point in the right direction, one should stay away no matter how high the stock prices go.

The Small Cap superstars of 2015

3.45

Is the next US recession only 12 months away? At least this is what Billionaire investor Sam Zell believes is likely to happen. As you would be aware, a big day in financial history has come and gone. Janet Yellen, the US Fed Chairperson, has finally pulled the plug on the so called Zero Interest Rate Policy (ZIRP) and has raised benchmark rate for the first time in nearly a decade. However, Zell is of the view that the increase has come at least six months too late. There are already a lot of other headwinds facing the global economy. And throwing one more into the mix could make things dangerous for the US economy as per him.

To be honest, the Fed had been stuck between the devil and the deep sea for quite some time now. Raising rates earlier would have meant exposing a fragile economic recovery and keeping it for too late amounts to letting asset bubbles build up to dangerous levels. And therefore while the Fed may be thinking that the hike has come at the right time, we are not so sure. There are a lot of places where asset bubbles are clearly visible and deflating them without a huge domino effect will really take some serious balancing skills.

4.48

Meanwhile, Indian markets seem to have taken the rate hike in their stride, the benchmark indices were nearly flat at the time of writing. The Sensex was trading lower by 13 points while the Nifty around 3 points lower. Amongst sector stocks, FMCG and Auto were trading marginally lower.

INTRODUCTION:Equitymaster Agora Research Private Limited (hereinafter referred to as "Equitymaster"/"Company") was incorporated on October 25, 2007. Equitymaster is a joint venture between Quantum Information Services Private Limited (QIS) and Agora group. Equitymaster is a SEBI registered Research Analyst under the SEBI (Research Analysts) Regulations, 2014 with registration number INH000000537.

BUSINESS ACTIVITY:An independent research initiative, Equitymaster is committed to providing honest and unbiased views, opinions and recommendations on various investment opportunities across asset classes.

DISCIPLINARY HISTORY:There are no outstanding litigations against the Company, it subsidiaries and its Directors.

GENERAL TERMS AND CONDITIONS FOR RESEARCH REPORT:For the terms and conditions for research reports click here.

DISCLOSURE WITH REGARDS TO OWNERSHIP AND MATERIAL CONFLICTS OF INTEREST:

'subject company' is a company on which a buy/sell/hold view or target price is given/changed in this Research Report.

Neither Equitymaster, Research Analyst or his/her relative have any financial interest in the subject company.

Equitymaster's Associate has financial interest in Mahindra and Mahindra

Neither Equitymaster, it's Associates, Research Analyst or his/her relative have actual/beneficial ownership of one percent or more securities of the subject company at the end of the month immediately preceding the date of publication of the research report.

Neither Equitymaster, it's Associates, Research Analyst or his/her relative have any other material conflict of interest at the time of publication of the research report.

DISCLOSURE WITH REGARDS TO RECEIPT OF COMPENSATION:

Neither Equitymaster nor it's Associates have received any compensation from the subject company in the past twelve months.

Neither Equitymaster nor it's Associates have managed or co-managed public offering of securities for the subject company in the past twelve months.

Neither Equitymaster nor it's Associates have received any compensation for investment banking or merchant banking or brokerage services from the subject company in the past twelve months.

Neither Equitymaster nor it's Associates have received any compensation for products or services other than investment banking or merchant banking or brokerage services from the subject company in the past twelve months.

Neither Equitymaster nor it's Associates have received any compensation or other benefits from the subject company or third party in connection with the research report.

GENERAL DISCLOSURES:

The Research Analyst has not served as an officer, director or employee of the subject company.

Equitymaster or the Research Analyst has not been engaged in market making activity for the subject company.

Definitions of Terms Used:

Buy recommendation: This means that the investor could consider buying the concerned stock at current market price keeping in mind the tenure and objective of the recommendation service.

Hold recommendation: This means that the investor could consider holding on to the shares of the company until further update and not buy more of the stock at current market price.

Buy at lower price: This means that the investor should wait for some correction in the market price so that the stock can be bought at more attractive valuations keeping in mind the tenure and the objective of the service.

Sell recommendation: This means that the investor could consider selling the stock at current market price keeping in mind the objective of the recommendation service.

Feedback:If you have any feedback or query or wish to report a matter, please do not hesitate to write to us.

ABOUT EQUITYMASTER

Since 1996, Equitymaster has been the source for honest and credible opinions on investing in India. With solid research and in-depth analysis Equitymaster is dedicated towards making its readers- smarter, more confident and richer every day. Here's why hundreds of thousands of readers spread across more than 70 countries Trust Equitymaster.

All rights reserved. Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement.

LEGAL DISCLAIMER: Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA or Canada, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.